Deck 27: Intermediate-Term Debt and Leasing

Question 1

Term loans are frequently retired by annual dividend payments.​

Answer 1

False

Question 2

The firm will prefer debt to leasing since interest is a tax deductible expense while lease payments are not tax deductible.​

Answer 2

False

Question 3

Both lease payments and depreciation are tax deductible expenses for the lessee.​

Answer 3

False

Question 4

Blanket inventory loans are illustrations of unsecured short‑term credit.​

Question 5

If a lease is capitalized, the liability is carried on the lessor's balance sheet.​

Question 6

Term loans are​

A) ​usually for twenty years
B) ​generally lack collateral (i.e., unsecured)
C) ​made by insurance companies
D) ​short term obligations

Question 7

Operating leases are examples of off‑the‑balance‑sheet financing.​

Question 8

A prime reason for leasing is to receive the depreciation associated with the asset.​

Question 9

The lessor depreciates the equipment while the lessee deducts the cost of the lease.​

Question 10

All term loans are supported by collateral.​

Question 11

Term notes sold to the general public​

A) are usually for twenty years​
B) ​generally have collateral (i.e., are secured)
C) ​are generally non-callable
D) ​have variable interest rates

Question 12

If a lease is capitalized, the present value of the lease payments is put on the firm's balance sheet as a liability.​

Question 13

If a firm has a need for finance, it may sell an asset and lease it back.​

Question 14

The residual value (i.e., salvage value) reduces a lease's cash inflows.

Question 15

The larger an asset's salvage value (i.e., its residual value), the stronger the argument to own instead of leasing.​

Question 16

An operating lease generally does not have a maintenance contract.​

Question 17

The lessor owns the asset while the lessee has the use of the asset.​

Question 18

Intermediate term notes sold to the general public are usually secured by collateral.​

Question 19

The use of leasing does not increase the firm's use of financial leverage.​

Question 20

If a firm sells equipment and subsequently leases it back, that is illustrative of a leveraged lease.​

Question 21

A firm may choose to lease if​

A) ​it is in a lower tax bracket and cannot use the depreciation expense
B) ​it depreciates the asset
C) ​the present value of its cash outflows under leasing is larger
D) ​the asset's residual value is large

Question 22

If a term loan requires equal annual payments that pay the interest and retire the principal, that is similar to​

A) ​lease payments
B) ​mortgage payments
C) ​dividend payments
D) ​compensating balances

Question 23

What is the repayment schedule for the first three years for a twenty‑year mortgage loan of $75,000 with a 12% rate of interest if the annual payment is $10,041.50? (This material was initially covered in Chapter 7, and the concept reappears in this chapter.)​

Question 24

Capitalizing a lease​

A) ​reduces income
B) ​reduces equity
C) ​increases current assets
D) ​increases debt

Question 25

​A firm could buy an asset for $20,000 by borrowing the funds at 10 percent for four years with interest paid annually and the entire loan repaid at maturity. The firm could lease the equipment for $5,800 a year including maintenance. If the firm does buy, maintenance will be $600 a year. The estimated after-tax salvage value is $1,250, and depreciation will be $5,000 annually. Construct projected cash outflows for each alternative for each year. Assume a 30 percent income tax rate. Is leasing the better alternative if the firm uses a cost of funds of 10 percent?

Question 26

If a lease is not capitalized,
1) the return on assets is overstated
2) the return on assets is understated
3) the use of financial leverage is overstated
4) the use of financial leverage is understated​

A)1 and 3​
B)​1 and 4
C)​2 and 3
D)​2 and 4

Question 27

A financial lease is similar to an operating lease, since​

A) ​the firm owns the asset
B) ​the lease contract lacks a maintenance clause
C) ​the lessor owns the asset
D) ​the lease may not be canceled

Question 28

A firm could buy an asset for $10,000 by borrowing the funds at 12 percent for four years. Construct the payment schedule for this loan if equal, annual payments retire the loan and pay the interest.​

Question 29

A firm could lease the equipment in the previous question for $3,700 a year. If the firm purchased the equipment for $10,000, the maintenance expense will be $350 a year; depreciation is $2,500 annually, and the firm pays $250 to have the equipment removed. Construct projected annual cash outflows for each alternative. Assume a 25% income tax rate. Is leasing the better alternative if the firm uses 10 percent cost of funds?​

Question 30

If a term loan requires equal annual payments that retire the loan and pay the interest, that is similar to​

A) lease payments​
B) ​mortgage payments
C) ​dividend payments
D) ​a sinking fund

Question 31

Features of a term loan include
1) restrictive covenants
2) repayment schedules
3) dividend payments​

A)1 and 2​
B)​1 and 3
C)​2 and 3
D)​only 2

Question 32

A financial lease is similar to an operating lease, since​

A) in both cases the lessee has the use of the asset​
B) ​in both cases the lease has a maintenance contract
C) ​the lessee owns the asset
D) ​the lease payment is not tax deductible

Question 33

If a firm leases instead of borrowing, it
1) owns the asset
2) has the use of the asset
3) receives the depreciation expense
4) losses the asset's residual value​

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​2 and 4

Question 34

In a sale and leaseback​

A) ​the lessee sells its equipment back to the lessor after a period of time
B) ​the lessee sells equipment to a lessor and leases back the equipment
C) ​the lessor borrows funds to purchase the asset from the lessee
D) ​the lessor sells the asset to the lessee